Bitcoin Maverick Returns for New Crack at Digital Currency

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Bitcoin Maverick Returns for New Crack at Digital Currency

Jed McCaleb.

Photo: Ariel Zambelich

Jed McCaleb likes building things that make powerful people nervous.

In 2000, as Napster was starting to implode, he came up with a peer-to-peer filesharing network called eDonkey 2000 that soon became the world's most popular way of sharing music online. Six years later, following legal action from the Recording Industry Association of America, he got out of the game.

Act Two was Mt. Gox, which is now the world's largest exchange for Bitcoin, the popular digital currency. McCaleb started the site in 2010, using a leftover domain name he'd registered a few years earlier for a card-trading site. He wrote new code to handle Bitcoin-to-dollar trades, and the site was an instant hit. Within a few months, customers were wiring him large amounts of cash for their trading accounts, and McCaleb decided to bail, citing a hazy regulatory market. Sure enough, the feds are now starting to crack down.

So now it's time for Act Three: an alternative to Bitcoin known as Ripple. The project is, in some ways, an effort to hone and improve the digital currency, hoping to move us even further into a world that isn't so dependent on traditional money and the established organizations that control it. The only trouble is that McCaleb may once again raise the ire of the feds.

>Ripple is yet another effort to hone and improve Bitcoin, hoping to move us even further into a world that isn't so dependent on traditional money and the established organizations that control it

After selling Mt. Gox, McCaleb started thinking more deeply about Bitcoin. He was a huge fan, but he thought he could do some things better. First, he wanted to do away with Bitcoin mining – the process by which computers on the network verify transactions in exchange for Bitcoins. Because miners are rewarded in proportion to the processing power they add to the network, Bitcoin mining has become a bit of an arms race, with very specialized and powerful computers now doing the bulk of the work.

McCaleb, a 38-year-old surfer and Berkeley dropout from Little Rock, Arkansas, sees this as excessive. By his reckoning, there's $160 million spent annually on mining the Bitcoin network, "which is insane," he says. "And this isn't something that's going to go away. It just gets worse and worse."

So he hired some developers and started work on Ripple. Like Bitcoin, Ripple comes with its own digital currency – called the XRP – and its own peer-to-peer money-moving network. But there's a twist: Ripple makes it easy to move any type of money – you can trade dollars for Yen or Euros or even Bitcoins – and instead of exchanges, Ripple uses a set of independent operators, called gateways, who handle the business of taking and delivering the fiat cash. The company's ambitious plan is to build a network of open-source servers that can move money around the world at a tiny fraction of the cost of a bank or a company such as Western Union.

At the center of everything is the XRP. It acts as a kind of lingua franca for all trades on the network. Want to trade dollars for Bitcoins? Ripple takes your dollars and sells them for XRPs. Then it finds someone else who will trade those XRPs for Bitcoins.

That business model could make the XRP very valuable and McCaleb and his partners very rich. Although only about 4 percent of them are being actively traded, the theoretical total value of all 100 billion XRPs in existence is now about $1.4 billion. Compare that to Bitcoins, which are collectively worth just over $1.6 billion.

McCaleb and the company he created, Ripple Labs, have vowed to give away 55 percent of all XRPs, but they're sitting on the rest. In fact, that's the company's business model. Although they employ a staff of 20 to build and distribute the open-source Ripple software and work with government regulators, they don't sell anything.

Ripple Labs CEO Chris Chris Larsen compares his company to Linux maker Red Hat, which makes money selling services around open source software, but in reality, Ripple uses a different kind of open-source business model: You build a digital currency and get rich if it takes off.

The fact that one company controls so much of the XRP currency makes some Bitcoin backers nervous. But there's room for both Bitcoin and Ripple, says Faisal Islam, director of Compliance Advisory Services with Centra Payments Solutions, a financial services consultancy. "Bitcoin is to Android what Ripple is to Apple," he says. "I truly believe both of them are going to be successful."

>Ripple uses a different kind of open-source business model: You build a digital currency and get rich if it takes off

So far, Silicon Valley seems to think McCaleb's idea worth a shot. Ripple Labs has taken $3 million in investments from well-heeled VCs such as Andreessen Horowitz and Google Ventures.

But there's a very tricky part to the business: finding companies willing to act as money transmitters for a brand new digital currency. Regulators in the U.S. have had big problems with Bitcoin companies, and have effectively shut some early players out of the U.S. market, including Mt. Gox.

Ripple Labs is meeting with U.S. regulators and is working to address concerns and smooth things over, but if the feds get nervous, they could start squeezing Ripple's gateways.

If that happens, it probably won't be McCaleb's problem. He split from Ripple Labs back in July (he is, however, still on the Ripple Labs Board of Directors). But he and the other two company founders collectively own 20 billion XRPs, so he stands to benefit a lot if everything works out (how much, exactly, he won't say).

Meanwhile, McCaleb is spending his time looking into new things: man-made surf parks and artificial intelligence. That may seem like a departure. But like his past projects, it's all about freedom, about doing something just because you want to. "I do have a distrust of authority," he says. "Or maybe not a distrust of authority, but I really appreciate freedom. I think it's one of the fundamental things that people need."